- Ongoing restructuring of key metal activities (nickel, copper, zinc, rare earths, aluminium)
- Low production costs for large global producers
- Products used in many industries across the world, notably in electrical battery manufacturing and aluminium parts for electric vehicles
- The pandemic has affected both supply and demand
- Low production capacity rates across the world
- Increased pressure from Chinese authorities to reorganize the steel and aluminium industries
- Highly dependent on Chinese economic policy
- Strong challenges in “client sectors” (construction, automotive)
The coronavirus pandemic led to a sudden halt in economic activity, thus hampering the metals sector as a whole. Coface anticipates a -4.4% drop in global GDP in 2020, after +3.2% and +2.5% in 2018 and 2019, respectively. Many client sectors such as construction, aeronautics and automotive have drastically reduced their demand for metals because of the COVID-19 crisis.
According to SteelHome, average monthly steel prices in the United States (U.S.), China and Europe fell by 30%, 4% and 8%, respectively, between May 2019 and May 2020.On the other hand, iron ore prices dropped less significantly due to weather-induced supply shortfalls in Australia and Brazil (many fires notably) and mine closures in the latter country. The monthly price fell by only 0.3% between May 2019 and May 2020.
However, the economic recovery is underway, although disparate between countries and heavily dependent on public support measures for investment. Household consumption remains below pre-pandemic levels, due to declining incomes and increased precautionary savings, induced by the uncertainty caused by the health crisis.
Sector Economic Insights
The coronavirus pandemic led to drastic containment measures, mainly during the first semester, which affected economic activity. As a result, the metals sector, which is very heavily dependent on the global economy, is expected to experience high price volatility, complicating the task of purchasing managers in the manufacturing sector. This is supported by the fact that the client sectors from the manufacturing industry, in this case automotive and to a lesser extent construction, are facing difficulties because of the development of the pandemic. The economies of the main markets, particularly the advanced economies and China, are experiencing a very sharp slowdown in their economic activity in 2020 (-6.8% after 1.7% in 2019 for advanced economies and 1% after 6.1% for China).
Global consumption of steel, copper and nickel is expected to decline by 6.4%, 2.5% and 15%, respectively, in 2020 according to the Australian Government’s Department of Industry, Science, Energy and Resources. While mining had been considered as a key sector in many countries, production reduced significantly during the lockdown period. Indeed, difficult working conditions, especially in closed spaces, are conducive to the spread of the virus. As of 25 June 2020, disruptions were reported in 275 mines across 36 countries, according to S&P Global Market Intelligence Data. Although mining production has now resumed in many countries, the metals sector is facing many challenges caused by a decline in demand because of depressed economic conditions.
Mine closures have occurred in the largest producing countries, of which the recoveries have been differentiated. The mining region of Antofagasta in Chile, where the world's largest open-pit copper mine – Chuquicamata - is located, is the second most affected region by the Covid-19 epidemic in Chile, after the capital Santiago. To cope with the virus, the number of workers in the mines was reduced, resulting in a drop in production. This decline in supply, linked to disruptions in producing countries, was widely offset by the decline in demand, causing a drop in metal prices.
The profitability of several business segments decreased overall between Q1 2019 and Q1 2020, with only the nickel segment slightly increasing its profitability thanks to higher EBITDA (see Chart 2). This decline in profitability should continue in Q2 2020. Despite an increase in the value of net debt by 12% and 24% for the copper and non-ferrous metals industries between Q1 2019 and Q1 2020, respectively, the net debt to assets ratios remain stable over the same period. The debt ratios for the steel and aluminium sub-segments are also stable, as these experienced an increase in the value of their net debt during 2019, which faded away at the beginning of 2020 (down 4% and 1% over one year, respectively).
Metallurgical activity in Asia is recovering more steadily than in other major markets worldwide, as lockdown measures were eased earlier. Containment measures have been lifted in most countries where contamination receded from the peak. The reopening of the mines, which began in Q2 2020, will enable an increase in supply determined by the gradual upturn in activity in the construction and automotive industries, the main users of steel products. This recovery is disparate, depending on geography: steel production increased by 1% in China, whereas the European Union and North America saw declines of 18% and 17% in 2020, respectively.
In China, where measures have been eased since April 2020, the recovery was supported by the central government's infrastructure projects. By the end of June 2020, steel production in China had returned to its pre COVID-19 level. Between February and July 2020, the capacity utilization of steel plate plants in China increased by 15 percentage points, from 70.5% to 85.5%.
In India, demand for steel decreased by 90% in April due to lockdown measures. Despite less stringent measures, migrant workers who went back to their villages are refusing to return to construction sites, by fear of COVID-19 contamination. Authorities in the state of Maharashtra, of which Mumbai is the capital, estimate that 80% of construction workers have left the financial capital of the country.
In Europe, the demand for metals, which is linked to the recovery, also relies on public infrastructure, as demand from the residential and non-residential segments is declining due to lower income and investment. According to Eurofer, construction investment is expected to decline by 10.5% in 2020 before rebounding by 7.6% in 2021. The construction sector, which is less responsive to the economic situation, but is more resilient than the automotive and household appliances sectors, of which output is expected to decline by 26% and 10.8% in 2020 before rebounding by 25.3% and 5.7% in 2021, respectively, according to Eurofer.
In the United States, where the epidemic is not yet under control, the decline in steel demand and production should continue. According to the ISM (Institute of Supply Management), the Manufacturing Index reached 41.5 in April against 49.1 in March, demonstrating the fragility of the manufacturing sector.
In South America, where COVID-19 continues to spread, the industrial sector is being hit hard. In Brazil, the most affected country in South America, industrial production decreased by 9% between June 2019 and June 2020. The Brazilian construction and automotive sectors are also suffering from the COVID-19 crisis. GlobalData predicts a 6% contraction of the textile industry in 2020 and according to Brazil’s National Association of Manufacturers of Motor Vehicles (Anfevea), only 1,847 vehicles were produced in April 2020, a 99.4% drop compared to April 2019.
Trends in the prices of the main metals reflect the evolution of the economic and health crisis. After declining in response to the COVID-19 crisis, prices of main metals are on the rise. Between June 2020 and August 2020, the monthly prices of aluminum, zinc and nickel increased by 6%, 9% and 6%, respectively, echoing the gradual recovery, notably in China. The price of copper is rose strongly by 16%, due to speculators betting on the recovery of economic activity, as copper is a leading economic indicator of the dynamics of the world economy. According to SteelHome, average monthly steel prices in China and Europe increased by 6% and 8% between June 2020 and August 2020, respectively. Over the same period, the price of steel in the United States fell by 3%. While metal prices are still lower than in 2019, they should rebound in 2021 thanks to increased activity in customer sectors of the manufacturing industry.
Lower prices, in comparison to historic trends, mean lower margins for companies in the sector. Nevertheless, the steel industry remains profitable and is navigating through the COVID-19 crisis with more resilience than in the subprime crisis in 2008-2009. However, it is worth noting that companies with lower costs and more sustainable demand better managed to limit the negative effects of this global shock.
In the medium-term, the need to reduce the sector's environmental impact and the continued development of electric motors should have a major impact on its business outlook.
The development of wind and solar energy, as well as the democratization of the electric car, require very large quantities of copper and nickel. A car with electric propulsion contains 3 times more copper than a car with thermal propulsion. For nickel, the differences can vary from 3 to 30, depending on the technologies and technical characteristics of the vehicles. Car manufacturers, who are seeking to reduce the weight of vehicles, will eventually favor aluminum, which is 10 to 40 times lighter than steel. This will help increase the vehicle's autonomy.
In line with the development of a Green Deal, an investment program in green energy, European States are trying to build a consensus to make the continent's economy sustainable, in particular through the exploitation of natural resources. Thus, Coface expects the demand for metals and alloys such as aluminum, nickel, palladium and platinum to grow in the coming years. In this context, small and medium-sized companies in the metals sector could face difficulties, as the transition of the sector will require heavy capital expenditure, particularly in R&D and in the extraction of ore.
Last update : September 2020